Sub-Saharan Africa currency crisis persists

A currency risk that increased notably over the past year in sub-Saharan Africa (SSA) is seen remaining elevated over the next 18 month with the South African rand depreciating further, according to research by Oxford University’s NKC African Economics (NKC).

A depreciating rand, according to south African-based independent Zimbabwean financial analyst Coll Ndlovu, can be beneficial to Zimbabwean consumers in the form of cheaper imported goods, given that the country imports most of its products from South Africa, hence signs of deflation within the Zimbabwean economy.

In a regional SSA short-term exchange rate outlook, NKC said the fragile South African rand will primarily be a barometer of regional market perceptions with regard to US debt curve repricing and China-related growth concerns.

“We expect the rand to depreciate from an average of R13,87/$ in 2015 Q4 to R14, 22/$ in 2016 Q,” reads part of the report.

“We ascribe a 60% probability to US monetary policy tightening by December. Under this assumption, we anticipate the rand to trend somewhat firmer in successive quarters, averaging R14,09/$ in Q2, R13,99/$ in Q3 and R13,89/$ in Q4. Risks are however, tilted to the downside — ie rand weakness,” added NKC.

The research unit said currencies in the SSA region have had a tumultuous ride this year, undermined by a prolonged commodity price slump, and the resultant spillover effects to the balance of payments and fiscal positions, as well as global growth concerns and external monetary policy decisions.

The research unit argued a result monetary policy, on aggregate, is expected to be skewed towards aggressive tightening over the next 18 months as price stability will be favoured above short-term growth potential.

NKC said the fragile Zambian kwacha — which has been hit by a severe shock to the terms of trade — is susceptible to rapid depreciation as a loss of confidence incentivises front-loading of dollar purchases.

“The loss of confidence in the kwacha, as well as political uncertainty surrounding the election next year, could see the exchange rate remain weaker than the estimated equilibrium value for an extended period of time,” said NKC.

“It is crucial that confidence be restored in the kwacha in order to limit the spillover effects to the sovereign balance sheet. With the budget speech for 2016 calling for a further increase in commercial external borrowing, Zambia faces a conundrum. We argue that Zambia needs to urgently seek support from the International Monetary Fund (IMF) and/or World Bank to meet borrowing requirements and re-establish investor confidence,” added NKC.

Another devaluation of the Angolan kwanza before the end of the year to Kz144,5/$ from the current rate of Kz134,63/$ is forecasted by NKC.

“Further shocks to the oil price hold a risk that the (Angolan) central bank will introduce more restrictive capital controls,” said the research unit.

NKC said it expects world GDP growth to equate to 2,5% this year before accelerating to 2,7% in 2016, a downward revision from an earlier projection of 2,6% for 2015 and 3% growth next year.

“Slow world trade growth — which incentivises competitive devaluations — as well as deteriorating terms of trade, rising inflation differentials, adverse weather conditions as well as foreign factors pertaining to US yield curve repricing are expected to increasingly weigh on SSA currencies in coming months,” said NKC.